In Down Market, Size Up Your Adviser

Quarterly Investment Report

But for financial advisers and their clients, the dramatic year that just passed in the markets also may be the most important test of whether the relationship can last.

'"When the market is going up, everybody looks good," said Michael Andreola, tax partner at BDO Seidman LLP in New York. Now, he said, investors have had a chance to measure the talents of their financial planner, broker or other adviser against the toughest stock market in more than a decade.

Has your financial adviser earned his or her fees over the last year? These questions can help you answer that:

Were you prepared?

Good financial advisers go over the potential risks and rewards of various investments before customers put their money on the line. That means whatever losses you suffered in the past year should have been in a range you expected.

"Examine the surprise factor," said Chuck Jaffe, author of The Right Way to Hire Financial Help (MIT Press, 2001). "You should not be surprised by something happening in your portfolio."

Was your portfolio diversified before the market sank?

Savvy financial advisers make sure their clients are well diversified in terms of asset classes and individual investments.

What that means is most people should have some money in stocks, some in bonds and some in short-term cash accounts. But that's just the first step.

Step two is making sure that the stock portion of the portfolio, for example, includes a variety of mutual funds and/or individual stocks.

An adviser who isn't paying attention can fill a client's portfolio with mutual funds that are heavily invested in the same narrow area -- tech stocks, for example -- even though the funds may appear on the surface to be broadly diversified. That can leave the portfolio vulnerable if that particular segment of the market takes a hit.

Have your investments matched your ability to tolerate risk?

Investors often tell financial advisers that they want to earn a target rate of return on their money each year -- say, 10 percent or 12 percent, said James Shambo, a certified public accountant and personal finance specialist with Lifetime Planning Concepts in Colorado Springs, Colo.

But clients frequently don't understand the risks they may have to tolerate to generate their desired return, he says. They also may not realize that, to reach their financial goals, they may not need a particularly high return and its attendant risk.

It's a good sign if an adviser got you started on a regular savings pattern -- and can tell you how much progress you've made, experts say.

It's a bad sign if the planner simply wants to help you invest money that you've already accumulated, without a plan for investing future savings, dealing with estate issues, etc.

Have you followed the plan your adviser laid out?

You can have a personal trainer, but it will do little good if you continue to consume large quantities of doughnuts. Investing is much the same: You have to follow through on a plan.

Do you own products -- or a portfolio?

There's no reason to own more than two mutual funds in a single market niche, Jaffe says.

Experts' suspicion when they see such "copy-cat" funds in the same portfolio is that an adviser is simply selling clients products to earn commissions.

Have you understood, and are you OK with, how your adviser is compensated?

A good adviser should be willing and able to explain clearly how he or she is paid -- whether through commissions on products you buy, a set annual fee, or both.

Though conflicts of interest naturally can arise with commission sales, that doesn't necessarily mean they exist with your adviser.

What's more, fee-only advisers aren't without potential conflicts of interest. Because they typically charge an annual fee that's a percentage of the assets they manage, they can benefit from counseling you to keep your money invested, rather than use it for other purposes, such as paying off debt.